The GeoTeam's  Instablog

<<Part 1 of 3

The GeoTeam attended the Rodman & Renshaw Annual Global Investment Conference from Tuesday Sept. 8 Friday, Sept. 11, 2009. In addition to viewing investor presentations of numerous companies, we also sat down with the management of several U.S. traded Asian based firms with intriguing growth stories.

China Kangtai Cactus Bio (CKGT.OB). Coded as a GeoSpecial on August 14 at $0.95. Price ended Sept. 18, 2009, $1.39.

China Kangtai is a vertically integrated grower, developer, manufacturer and marketer of a variety of Mexican cactus-based consumer products including nutraceuticals, beverages (juice, health drinks, beer and wine), packaged foods and various intermediary products containing cactus, cactus fruit, and cactus derivatives.

The Rodman & Renshaw conference afforded us a chance interview management after their presentation to garner a better understanding of the growth opportunities available for China Kangtai.

During their presentation, the Company management explained that China Kangtai recently expanded its reach into the animal feed industry. Its cattle and fish feed product lines comprised 4% of the Company’s revenues for 2008. Its most recent feed initiative for launch in the 4th quarter of 2009 is a cactus additive for the hog market. The Company estimates revenues for the hog feed line to be $330,000 for the 4th quarter of 2009.

Supported by strong industry growth trends, CKGT postulates this product could potentially become a significant contributor to its business.

• China’s animal feed market is the second largest in the world.
• China is the number one hog producer in the world.
• Over 65% of all meet consumption in China is from pork.
• The benefit of cactus used as an animal feed additive is supported by industry studies.

The Company is also very excited about its anticipated launch of a new non/low nicotine cigarette product line. We must admit, we are a little skeptical about consumer acceptance of this line, but China Kangtai is confident that Chinese consumers will embrace it.

• China accounts for 30% of global smokers
• Smoking has become a fad for the Chinese youth.
• Government supports health preserving cigarettes
• Surveys indicate that 47% of Chinese smokers will accept the product line.

It will be interesting to monitor the evolution of this product line.

Overall we were impressed by the Company’s ability to quickly address some of our concerns.

Question 1
Concern from a GeoInvesting member: The acres of available farm land to grow cactus is plentiful. How does this affect China Kangtai’s competitive position?

Answer
The Company holds valuable patents on its products and manufacturing process. Concerning cacti planting we have already registered two brands "Mexican Milpa -Alta Edible Cactus" and "Mexican Pyramid Edible Cactus". “With respect to the cactus series product production and processing, we already have 18 invention patents. Each patent has 20 years of validity, and then we can apply to continue for another 20 years to keep it valid.”

Question 2
Why is CKGT in only 22 provinces?

Answer
The Company is waiting for the right time in terms of product acceptance to enter other provinces.

Question 3
Why have product offerings trends been in-consistent?

Answer
Again, the Company is waiting for the right time in terms of product acceptance. Furthermore, CKGT does not want to be in a situation where it can not easily manage its business model. Product quality is more important than product abundance.

Question 4
Can the Company accelerate its EPS growth rate?

Answer
The Company expressed a goal to maintain consistent growth similar to recent trends. However, if CKGT were to raise capital its EPS growth trends could accelerate, likely 6 to 9 months from the deployment of capital. We have the sense that the Company is concerned with setting sustained and consistent growth objectives.

Question 5
What is the availability of competitive cactus in China?

Answer

• China Kangtai Accounts for 60% of edible cactus production in China. There are smaller growers that the Company cooperates with in order to let them produce some of the lower margin products, ultimately sharing in the profit.
• Preparing domestic non-edible cactus for non-food applications is costly.

Additional Highlights:

• China Kangtai has the most extensive cactus product line in China.
• Consistent 30% annual revenue growth over past three years.
• Many of its product lines are just beginning to gain popularity.
• Nutraceuticals are popular due to the absence of healthcare in China.
• Personal hygiene and cosmetics experiencing a 20-25 annual growth rate.

We didn’t have time to address some items on the cash flow statement needed to derive non-GAAP EPS figures which may be higher than its GAAP EPS. Furthermore, through the first six months of 2009 CKGT has paid a higher tax rate. In its final EPS analysis the GeoTeam generally prefers to use an apples to apples approach. This would ultimately entail adjusting CKGT numbers for certain non-cash charges using similar tax rates. We also have some questions regarding a much higher account receivable position.

In any event, if we utilize GAAP numbers the stock has finally managed to reach its book value per share of $1.43. We would still like to gain a better grip on the Company’s ability to grow its EPS in the 2009 third and fourth quarters, given the tough comparisons it faces for the 2008 second half period. It is important to note that the second half of the year is generally CKGT stronger period. Still, with the management’s conservative nature, its strong competitive position, recent entry into new product categories, its consistent revenue growth and the stock barley trading at book CKGT may appeal to value investors.

Skystar Bio-Pharmaceutical Co. (SKBI). Coded as a GeoSpecial on June 1 at $10.00. Price ended Sept. 18, 2009, $16.10.

Skystar is a China-based developer, distributor of veterinary healthcare/medical care products, used heavily in the meat farming industry.

One of the GeoTeam’s primary concerns regarding SKBI was the potential short-term dilution issue due to a recent public offering. Recall that the Company has had an impeccable long-term growth story with:

Compounded Annual Revenue Growth Rate 2003-2008: 84.39%
Compounded Annual Adjusted Net Income Growth Rate 2003-2008: 131.85%

We were not sure how investors would perceive a dilutive situation. Our concern was greatly alleviated by management’s confidence that the offering proceeds will be quickly deployed to expand its vaccine division, leading to significant growth in 2010. The vaccine division is the Company’s smallest contributor to revenue but carries the highest margin of Skystar’s four product lines. SKBI plans to increase the vaccine division by 23 times. Furthermore, we get the sense that the Company is actively seeking accretive acquisitions that could quell short term dilution issues. Analyst earnings per share estimates are $2.18 for 2009, followed by $4.22 for 2010. The GeoTeam will explore if Rodman’s estimates include any acquisition assumptions.

Presentation Points:

• Industry consolidation will fuel demand for SKBI’s product lines.
• SKBI has one of the most extensive product lines, able to offer farmers services from birth to slaughter.
• SKBI has one of the most extensive province coverage footprints.
• No current need to raise capital.
• A qualified management team, combined with an American management team, aids in establishing credibility.
• Adding to its 170 product portfolio, SKBI has already introduced 20 high margin products in 2009 and plans to introduce 20 more by year’s end.
• Ensuring high food standards is more important than ever.

Part 3 of 3>>

Disclosure: Long CKGT.OB, SKBI